Problem set 1 UNMSM

Gestión de Portafolio de Renta Fija

Profesora: Yessenia Portal Machuca
Septiembre 2019

Problem Set 1

1. You invest $100 for two years at 2 % compounded semiannually. How much do you have at
the end of the two years?.
Solution: Using basic compounded rates of return, the return is:
 t∗f req
r
Retornodolares = I 1 +
f req
 2∗2
0.02
= 100 1 +
2

= 104.06

2. You invested $100 for three years and, at the end of those three years, your investment was
worth $107. What was your semiannually compounded rate of return?.
3. Using the discount factors in the table, derive the corresponding spot and forward rates.

Term Discount factor

0.5 0.998752
1 0.996758
1.5 0.993529

Solution: We begin by deriving the spot rates. Spot rates are the rates earned on a single
cash ow between settlement and time t. This means that any return using spot rates can be
discounted to unit dollars. This gives us:
 t∗f req
r(t) 1
1+ =
f req d(t)
Where  −t∗f req
r(t)
d(t) = 1+
f req
Then  1/t∗f req !
1
r(t) = f req −1
d(t)
 1/2∗0.5 !
1
r(t) = 2 −1 = 0.25 %
0.998752
Problem set 1 UNMSM

 1/2∗1 !
1
r(t) = 2 − 1 = 0.325 %
0.996758
 1/2∗1.5 !
1
r(t) = 2 − 1 = 0.433 %
0.993529
We also know that a spot rate over time t is equivalent to combining a spot rate over time t−t0
and a forward rate from t0 to t. Since we are in a semiannual regime, this can be expressed as
t∗f req  t0 ∗f req 
r(t − t0 )
 
r(t) f (t)
1+ = 1+ 1+
f req f req f req
 
1 1 f (t)
= 0
1+
d(t) d(t − t ) f req
0
 
d(t − t )
f (t) = f req −1
d(t)
 
1
f (0.5) = 2 − 1 = 0.250 %
0.998752
 
0.998752
f (1) = 2 − 1 = 0.400 %
0.996758
 
0.996758
f (1.5) = 2 − 1 = 0.650 %
0.993529
4. Are the forward rates above or below the spot rates in the answer to the previous question?
Why is this the case?.
5. Using the discount factors from Problem 3, price a 1.5-year bond with a coupon of 0.5 %. If
over the subsequent 6 months the term structure remains unchanged, will the price of the
0.5 % bond increase, decrease, or stay the same?
 
5 0.5 0.5
B = ∗ (0.998752) + ∗ (0.996758) + 100 + (0.993529) = 100.1
2 2 2

6. The price of the 34 s of May 31, 2012 was 99.961 as of May 31, 2010. Calculate the price using
the discount factors in Table. Is the bond trading cheap or rich to those discount factors?

Date Discount factor

11/2010 0.99925
05/2011 0.99648
11/2011 0.99135
05/2012 0.98532

Solution: Given the dates, we have 4 cash ows of 0.75 %, and the price is:
2t   
cX t c
P = d + 100 + d(t)
2 t=1 2 2
Problem set 1 UNMSM

0.75 0.75
= (0.99925 + 0.99648 + 0.99135 + 0.98532) + (100 + ) ∗ (0.98532)
2 2
= 100.391